Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) has been on strong run recently, spiking on May 2 and drifting up since then, but Investec analyst Ian Gordon thinks that the market is overestimating the bank’s prospects for becoming profitable this year and that RBS management agrees with him, not with the bulls. Gordon has downgraded RBS to a Sell with a 325p price target (currently trading at 340p), in a report issued on June 12th titled ‘RBS Going down, going down, going down?’.

RBS tNAV per share to fall through 2014: Gordon

“Following RBS’ latest +16% 6-week “spike” we believe that the share price (once again) reflects a triumph of hope over reality and should duly correct” writes Gordon in a June 12 report. “Based on our interpretation of guidance, it would appear that RBS management broadly agrees with us! Time to reinstate shorts. We downgrade from HOLD to SELL.”

Gordon gives Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) credit for its restructuring efforts and cost cutting, but he is concerned that revenue is falling at a faster rate than operating expenses and the bank isn’t really that close to becoming profitable. After six years of losses, he expects to see further losses pulling tNAV per share down to a new low of 361p by the end of this year and then continuing to fall to 352p in 2015.

RBS tangible book 0614

Gordon says a premature government selldown would hurt RBS

Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) has outperformed other UK banks so far this year, and nearly outperformed the FTSE100, which Gordon attributes to the UK government’s large stake in the bank curtailing and near-term risk. So when an agreement between RBS and the British Treasury was announced that could end this arrangement sooner than expected, he thinks the market took it the wrong way.

“We were mildly incredulous at a recent suggestion in the media, (BBC and elsewhere), that an early selldown of c.£5bn of the Government’s c.80% stake in RBS might prove positive for the share price in the near-term,” he writes. “One of the key factors which currently supports RBS’ curious premium rating – trading on 1.0x 2015e tNAV – is the presumption that the Government is effectively “locked in” for the long term, thereby removing any near-term overhang risk.”

uk banks rel performance 0614 RBS

At the time, Jefferies analyst Joseph Dickerson argued that a faster selldown would benefit shareholders primarily because it would give Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) more control over its dividend policy. But then Dickerson and Gordon have had significantly different valuations for RBS for months now.